Reserve Bank Governor D Subbarao on Friday expressed concerns over Cyprus banks facing meltdown, saying it has implications on the banking sector everywhere.
The Cyprus banks' is "such a big issue" as the island nation is inter-connected with the world and what happens there has implications on the banking sector everywhere, he said.
"No financial system is too small to be allowed to sink", he said referring to the Greece crisis and Euro zone issue.
Cyrpus is trying to raise about $7.5 billion to avoid bankruptcy. If it can't, the European Central Bank has threatened to cut off emergency support for its banks
Subbarao was addressing an event 'Indian Banking - Looking beyond the crisis', organised by the Bankers' Club.
Even though only ten billion euro -- small by any standard as he put it -- would be needed to bail out Cyprus banks, the issue is big because of its implications on the banking sector internationally, Subbarao argued.
Subbarao also said the RBI would issue a notification shortly for implementation of Basel-III norms for banks from April 1 this year.
On relaxing regulations for financing of infrastructure by banks, he said: "Further relaxation is not advisable".
Subbarao said the people are investing in gold because interest rates on deposits offered by banks are negative in real terms. If the banks want to attract more deposits, they have to give higher interest but they may also have to raise the lending rates.
For investment to take place and the economy to grow, borrowing rate needs to low, he said. "How to give attractive rates for depositors and competitive rates for borrowers is a challenge".